15 June 2021 STEP Roundtable Q. 13, 2021-0883051C6 - Paragraph 104(13.4)(a)

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether the deemed taxation year end which occurs on the death of the primary beneficiary pursuant to paragraph 104(13.4)(a) would apply to an alter ego trust that has elected under subparagraph 104(4)(a)(ii.1) to not have that subparagraph apply.

Position: Where the election in subparagraph 104(4)(a)(ii.1) is made, paragraph 104(13.4)(a) will not apply to deem a taxation year to end on the day of death of the settlor of the alter ego trust.

Reasons: By electing to have subparagraph 104(4)(a)(ii.1) not apply to the trust, paragraph 104(4)(a) also would not apply to the trust. Accordingly, there is no relevant day of death for purposes of the preamble of subsection 104(13.4).

2021 STEP CRA Roundtable – June 15, 2021

QUESTION 13. Paragraph 104(13.4)(a) Deemed Taxation Year End for an Alter Ego Trust

Question

Generally speaking, where the settlor of an alter ego trust dies, the trust is deemed to dispose of its capital property (footnote 1) at the end of the day of death, and to reacquire the property immediately after that day, pursuant to paragraph 104(4)(a) of the Income Tax Act (the “Act”). Paragraph 104(13.4)(a) of the Act provides that on a death referred to in paragraph 104(4)(a), (a.1) or (a.4), the taxation year of the trust is deemed to end at the end of the day of death.

Does a deemed year end occur pursuant to paragraph 104(13.4)(a) where a trust that would otherwise be an alter ego trust makes an election under subparagraph 104(4)(a)(ii.1) to not have that subparagraph apply?

CRA Response

The preamble to subsection 104(13.4) considers the death of an individual that is “the death or later death, as the case may be, referred to in paragraph 104(4)(a), (a.1) or (a.4) in respect of the trust”.

Subsection 248(1) of the Act defines an “alter ego trust” (AET) for purposes of the Act as “a trust to which paragraph 104(4)(a) would apply if that paragraph were read without reference to subparagraph 104(4)(a)(iii) and clauses 104(4)(a)(iv)(B) and (C)”. In other words, an AET is described in clause 104(4)(a)(iv)(A) in conjunction with subparagraph 104(4)(a)(ii.1).

Subparagraph 104(4)(a)(ii.1) reads as follows:

(ii.1) is a trust (other than a trust the terms of which are described in clause (iv)(A) that elects in its return of income under this Part for its first taxation year that this subparagraph not apply) that was created after 1999 by a taxpayer during the taxpayer’s lifetime and that, at any time after 1999, was a trust… [Emphasis added]

Accordingly, where the trust elects in its T3 return for its first taxation year to have subparagraph 104(4)(a)(ii.1) not apply to the trust, the trust would not fall within the scope of that subparagraph and therefore, paragraph 104(4)(a) also would not apply to the trust. Therefore, we would not consider the settlor’s death to be relevant for purposes of the preamble to subsection 104(13.4) and as a result, paragraph 104(13.4)(a) will not apply to deem a taxation year to occur at the end of the day on which the settlor dies. Instead, the trust will generally have a deemed disposition on the day that is 21 years after the day on which the trust was created, pursuant to paragraph 104(4)(b).

We note that although a deemed year end does not occur, the terms of the AET include the requirement that the settlor is entitled to receive all of the income of the trust that arose before their death. As such, any income earned by the trust prior to the settlor’s death would be taxed in the settlor’s terminal T1 tax return.

We also note that by electing to have subparagraph 104(4)(a)(ii.1) not apply to the trust, the trust would not satisfy all of the required conditions in subparagraph 73(1.01)(c)(ii) and subsection 73(1.02) of the Act for a trust to qualify for a tax-deferred rollover on the transfer of capital property to the trust by the settlor. (footnote 2) In that case, the proceeds of disposition for the settlor on the transfer of the capital property to the trust would be deemed by subsection 69(1) of the Act to be the fair market value of the property so transferred.

As noted in the question, subsection 104(13.4) applies to the other trusts described in paragraphs 104(4)(a), (a.1) and (a.4). The above comments do not apply to these other trusts because none of these provisions have the “electing out” language as found in subparagraph 104(4)(a)(ii.1). For the other trusts described in paragraphs 104(4)(a), (a.1) and (a.4), paragraph 104(13.4)(a) will deem a taxation year to end at the end of the day of death referred to in those paragraphs.

William King
2021-088305

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 The preamble of subsection 104(4) refers to “each property of the trust (other than exempt property) that was capital property (other than depreciable property) or land included in the inventory of a business of the trust”

2 Paragraphs 73(1.02)(a) and (c) would be not be met.